Oh, how times have changed. During the early 1990s placing security orders required a call to the broker (for us that was and still is Charles Schwab & Company), paper applications and checks had to be submitted manually and we did a daily financial market recap on the radio. Today, we place security orders, submit applications, other documents and checks via the Internet. Our daily market recap has also been eliminated as the investors can check their portfolios via an app on their phones, tablets, laptops or desktops.
The rapid development in technology over the past three decades has given even the novice investor the ability to execute trades in seconds as compared to minutes and sometimes hours if your advisor is not available.
Professional investors have the added benefit of computer-driven algorithms that, according to Bloomberg, actually accounted for more than 55% of all trades and 60% of all volume executed during 2016. By identifying trading advantages, it is quite possible that the widespread use of algorithms and other computer-generated trading has eliminated old Wall Street strategies such as the January Effect where historically small caps outperform during that month as well as “Sell In May And Go Away” where most market gains are realized during November through April.
The old school way of doing your own research, spotting trends in specific industries or securities was deemed over as was technical analysis where these algorithms could spot meaningful trends and patterns well before the average investor. In fact a growing percentage of industry followers believe that we could be witnessing the end of human traders and the beginning of total computerized investing. Evidence of this can be found in the statistic announced by Goldman Sachs during early February that over the past two decades 600 of its traders have been replaced with computer engineers, thanks to automated trading programs. It seemed like the end of an era with the Warren Buffetts and Benjamin Grahams of the world being replaced with computers that could calculate millions of trades per minute.
But not so fast
Not so fast as in the midst of this investing “revolution” investors plumb forgot why and for what they were actually investing.
Yes, high frequency trading has replaced many day traders who just could not keep up with the daily patterns of stock movements but it has done little for the long-term investor. High frequency trading did, indeed, provide an advantage to a very few geniuses out there who could actually create algorithms to see these daily patterns, but that does not mean these patterns provide lasting or meaningful information. Investors should concern themselves with the performance of the fundamentals of their holdings and how those fundamentals hold up through various market cycles. This is what is important.
Perhaps some of the trading advantages through the use of technical analysis by an individual are irrelevant in the world today. However, it has been our experience that once the secret is out the advantage is gone.
Every advance in technology is not groundbreaking. Computers are flawed as they don’t take into consideration the human condition/behavior and that is where we have the advantage. Being fearful when investors are greedy and greedy when investors are fearful has worked in the past, works now and in our opinion will continue to work. That trumps algorithms.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risk, and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518.279.1044.